Give back TARP money?

Old National decides to return funds, but other banks are undecided.

Old National decides to return funds, but other banks are undecided.

April 26, 2009|By YaVONDA SMALLS Tribune Staff Writer

It sounded like a good idea -- at first. In December, Old National Bank obtained $100 million by selling the government preferred shares of its stock. The money was given to healthy banks to provide additional capital to lend out. But for Old National, things changed. "Unfortunately, it became very clear shortly after we accepted the money that public perception and political rhetoric changed the nature of the program," said Bob Jones, president and chief executive of Evansville, Ind.-based Old National Bank. That's why the bank, which operates branches in Michiana, recently gave up the money it received from the government's TARP Capital Purchase Program. The money was officially returned March 31. "Our mission is to serve our community," Jones said. "And we think this is the best way to do that." Why give it back? At the end of the day, the bank saw several drawbacks to keeping the extra money. For one, rating agencies didn't see the funds as capital; they treated it as debt, Jones said. In addition, holding onto the money longer would have required Old National Bank to pay it back with interest. So returning the funds actually saves shareholders money, Jones said. One of the larger issues, too, was how the public would view the bank in light of all the negative news that has surrounded institutions such as AIG. Employees of AIG's financial-products unit recently received $165 million in so-called "retention" bonuses, angering taxpayers after billions were spent to bail out the company. Since many consumers tend to view all banks as the same, it just wasn't worth it for Old National to keep the money and possibly be painted with the same brush, Jones said. "Boy," he said, "I didn't think I could serve South Bend, and Mishawaka and Granger with the same degree of integrity if I were coupled with those institutions." And for Old National, returning the $100 million to the government seems to have worked in its favor. "The week we paid it back our stock was up 22 percent," Jones said. Of course, the market was up at the same time, but Jones said being able to return the money was helpful because it demonstrated the company's strength. "I think there's a lot of people that would love to be able to pay it back," Jones said. The reaction from the public, too, has been positive. "We have been overwhelmed by the positive response that we've gotten from phone calls, e-mails," he said. In fact, he's aware of a handful of clients who have come into the bank to open accounts simply after hearing of the bank's decision to return the funds, he said. Others following suit? While Old National and some other banks have given up money from the government's purchase program, a couple of local financial institutions are busy weighing their options. "We're examining it on an ongoing basis to see what makes the most sense for us," said Chuck Viater, president-north region, for Mutual Bank. Mutual Bank, which is based in Muncie, was approved for the program on Dec. 5. After carefully evaluating the pros and cons, the bank agreed to participate and issued $32.38 million of preferred stock to the Treasury Department on Dec. 23. "It's difficult to know at this moment (whether the money will be returned)," Viater said. 1st Source is still evaluating its next move, too. "We're going to continue to weigh our options at this point," said Christopher J. Murphy III, chairman and chief executive of 1st Source Corp. of South Bend. The company agreed to sell $111 million of its preferred, nonvoting shares of stock to the U.S. Treasury Department. Many people paint all financial institutions with the same brush, which is why many banks decided to give the money back, Murphy said. But it's also important, he noted, not to have "knee-jerk reactions to a lot of words." "Right now, I think it's appropriate to sit and wait and continue to do what we've always done," Murphy said. "It's a constant process of reassessing where we are, what we think is happening and whether we think it's appropriate to continue." For Murphy, it's a worthwhile consideration. After all, in Murphy's eyes the program actually looks to be working. Liquidity has improved, he said. Inter-bank lending has been restored and market lending is improving, he said. Plus, overall the program allows institutions like 1st Source to have an impact on the community. "We took the TARP money because we don't know what's going to happen with the economy," or with businesses and consumers, he said. "We believe it's very important for us to be there for them and work with them through these tough times." Old National's future Before it bought back its stock, Old National had an independent firm give it a "stress test," comparable to the reviews large banks experience. The test concluded that Old National is prepared to withstand the current economic climate, Jones said. The government approved the repurchase, and the bank faces no penalties, he said. And today, it's business as usual at Old National. "(We) continue to serve our community," Jones said. "Continue to serve our clients." In fact, Old National is expecting a new banking center in Mishawaka to be open by the end of July in Heritage Square. And the bank is looking for other opportunities to invest, Jones said. He acknowledges, however, that the economy still has its share of headwinds. For the economy to improve, he said, consumers simply have to become more confident, which can happen only when they see improvements such as job creation. "I don't know that the federal government injecting money into banks is going to help that confidence," Jones said. "You can't create demand. You have to have demand." Staff writer YaVonda Smalls: yavsmalls@sbtinfo.com (574) 235-6248